Investing Tips For Beginners | Proven Strategies For Wealth
Investing is a tried and true method of generating wealth, historically, investing in a diversified, long-term growth account with minimal fees has proven to be an effective tool for generating wealth. So how can you replicate those results? That's what we are discussing today, 5 investing tips for beginners:
Automate, Automate, Automate
Automation is key in securing long-term financial success, human input is the main factor that consistently reduces people's investing success.
In 1973, Burton Malkiel, a Princeton University professor claimed in his book, A Random Walk Down Wall Street, that "A blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by experts."
Funnily enough, this was proven wrong when Rob Arnott, CEO of Research Affiliates, stated at the IMN Global Indexing and ETFs conference that "The monkeys have done a much better job than both the experts and the stock market"
If a monkey can do it better than experts, they can do it better than you or I. So what's the key takeaway from this story? Pick a diversified strategy that meets your risk tolerance and automate it. The more input you have, the more you try to time the market or find niche stocks you think will do well, the more you will likely reduce your returns.
You don't have to be a monkey to do well in investing, pick a strategy that suits you and automate your investments to reduce any and all input required by you that may be affected by emotions or news you've watched. Stay consistent and the best way to do that is to automate and forget about it.
Know Your Time Horizon
Compounding is the key to big investment growth, compounding follows an exponential graph where you may not see the growth results initially but the majority of the returns accumulate after many years.
Compounding relates to where you, as the investor, reinvest your gains and dividends back into the assets you own which earns you even more. Let's say you have $1,000 and you can earn a 5% return every year on it. In the first year, you'd earn $50 which if you reinvest you now have $1,050 invested. In the second year, you make $52.50 which you can then add back to your investment balance which is now at $1,102.50.
If you left this $1,000 in an account that generated 5% every year after 30 years you'd have $4,312.94 and that's without ever adding more to the account.
Let's see what happens when you add more:
If we take our $1,000 invested and add $150 every month whilst maintaining our 5% return rate (which is pretty risk-averse). After 30 years of maintaining your 5% rate of return, you end up with a balance of $167,397.12! That's $73,000 that you put in and $94,397.12 you made from nothing! Now if you can add an extra 10 years onto that, your balance is now at $303,544.91!
This is all assuming you don't increase your contributions but the beauty is that as you get older and you start earning more you can make more contributions which compounds even more.
From the above example you can see that time makes a big difference so it's helpful to start early. If you haven't started already, now's the time to start studying and give yourself as big of a time horizon as you can to get the most out of compounding.
An additional, psychological benefit of knowing your time horizon means that in the event of a poor economic climate or economic event such as what we experienced during 2020, you can make better decisions based on your time horizon if you know you're still investing for another 20 years, current dips shouldn't be reason enough to sell. Knowing you're investing for the long term can help you relax and not panic sell as you know your time horizon is greater than the current economic climate.
Pick A Strategy And Stick To It
Once you have decided on a strategy that works for you, and accounts for your risk tolerance and requirements for diversification, make sure you stick to it. If you're aiming to invest for 30 years and every 5 or 10 years you stop investing in your initial strategy and start investing in the new trend, you'll dramatically reduce your expected returns. I see too many people flip-flopping between trends being pushed by crypto bros or whatever the new TikTok investment trend is. Sticking with a low-cost, diversified investment option for the long term will nearly always return better results than hopping between trends and popular investments.
If you enjoy following the hottest trend or investing in higher-risk options that's okay, but do it strategically. Invest the majority of your "investable cash" into a solid low-cost, diversified asset that you contribute to on a regular cycle, and then give yourself some "fun investing cash." Make sure that the fun cash isn't a material amount to you and that it's an amount you're comfortable losing. Once you have this amount, this is the money you can play with and have fun with, but don't get sucked into stopping your regular contributions to your core investments.
Do the research upfront and find a long-term option that suits you. Make sure when doing your research on options that suit you that you shop around and find some different sources of information, try listening to some different podcasts or reading different books.
I've provided a few for you below that might be helpful to start with some different ideas:
I've also written a blog post about the best personal finance books to get you started:
Understanding the costs
Investing costs money, in broker fees, exchange fees, and more. Understanding all of the costs associated with investing can be a big help in ensuring you get the most from your time in the market. I have a whole post on the factors that reduce your investment returns which specifically talks about costs:
The biggest cost for a lot of people can be a financial adviser who manages their portfolio for them. Costs such as an assets under management (AUM) fee to a financial adviser grow as your portfolio grows. Financial advisers can be useful but you don't need one to hold your investments forever, just to look over your portfolio and give you some guidance which can be easily paid through an hourly rate.
Asset under management fees as low as 1% can end up costing you hundreds of thousands of dollars in fees over the life of your investment portfolio. Just as our compounding math above showed us that our investment growth might seem small at first, over 30 or more years the growth in fees can be astronomical.
There can also be several hidden costs that may arise from working with a financial adviser such as insurance or other products they try to sell you. Beware of an adviser who tries to sell you on specific products as they are often receiving comissions from the products themselves.
Know the difference between volatility and risk
The common reason people don't begin investing is that they think it's too risky. People fear that they will lose all the money they put in because the market goes up and down all the time and one day it will just go down. After all, the news is filled with big red numbers going down every day. This fear is caused by a misunderstanding of risk & volatility:
Risk in investing represents the risk that your investments will not meet the expected returns or not generate any returns at all.
Volatility is the day-to-day movements in the market, these are natural and not what we want to pay attention to.
When we are investing for the long term, it's not the day-to-day fluctuations that we worry about but the overall movement of the asset. In the below graph of the S&P 500, we can see that despite the day-to-day fluctuations where we can see the highs and lows of each week, over the five years there was a steady increase in the value of the asset.
Markets will always jump up and down throughout the day, what we are concerned with is reducing our risk exposure. The cure to our risk exposure is diversification and selecting assets that align with our risk tolerances. Diversification includes acquiring assets across different asset classes, industries, and economies.
